Risk Function Still Second Class at FIs

Research conducted by SimCorp StrategyLab, a private, independent research institution, in conjunction with The Nielson Company found that risk management among investment management firms has lost status and moved down the line of reporting, even amidst one of the worst financial crises in decades.

Since 2007, the number of organizations that have the risk management function reporting into the board of directors has dropped by 5 percent (from 36 percent to 31 percent)—a fall of 14 percent within that group. On the positive side, during this same period, the organizations that have moved the overall responsibility of risk to the senior management level has increased by 5 percent (from 23 percent to 28 percent)—an increase of 22 percent within that group. This position is not expected to change, says SimCorp.

Seventy-six percent of respondents did acknowledge the increased strategic influence of the risk function as being the most important factor to effect an improvement in risk management. According to the researchers, this would imply a call from respondents for support from the most senior officers within the organizations. Even with the loss of status, the role and responsibility of the risk function expanded during 2008, according to 50 percent of interviewees. Key areas of future investment are expected to be in staff, staff competencies and the implementation of new models and methods.

The researchers noted two areas of concern. The first is that when asked: 'Does your current risk function contribute to efficient use or allocation or capital and resources within the organization?', 14 percent of the respondents replied 'Not at all'.

Also of concern is the lack of monitoring of strategic risk. This area of risk covers the long-term strategic objectives of an organization. It includes capital availability, sovereign and political risks, legal and regulatory changes and changes in the physical environment. A third of the respondents said they did not actively monitor strategic risk on a frequent or systematic basis.

"Much has been learned about the failures of risk management during the ongoing financial crisis," said Professor Ingo Walter, director of SimCorp StrategyLab, in a statement. "It is, therefore, disturbing that the findings of this survey suggest some of the needed reforms and the degree of urgency—notably about the resources needed for effective risk management and its role in overall senior management and strategy development—is not perceived by the respondents as compelling and in some ways is moving in the wrong direction."

The interviews were conducted by The Nielsen Company. The survey was based on 90 interviews with respondents who were randomly selected from investment management institutions, around the world. All people contacted had risk management as their primary field of work, and/or strategic responsibility, and/or decision-making with risk management. They were either executive or general management. The interviews were conducted during February and March 2009.